Review: (Gereffi et al., 2005) Governance of Global Value Chains

Gary Gereffi (Duke University), John Humphrey (Institute of Development Studies) and Timothy Sturgeon (Massachusetts Institutes of Technology)

Review of International Political Economy 12:1 February 2005: 78-104
Objectives
- Build simplest theoretical framework to explain governance patterns in global value chains that generates results relevant to real-world outcomes
* by bringing order to variety of network forms without accounting for rich detail and complexity brought about by historical, geographical and sectoral specificity
* that has ability to anticipate change in global value chains
Methods and Approach
The authors used an in-depth and fairly broad literature review to establish their theory of Global Value Chain (GVC) governance and then “tested” this theory by discussing in the context of 4 brief case studies:

*bicycles- hierarchy to market-based coordination

*apparel- captive to relational value chains

*horticulture- market coordination to explicit coordination

*electronics- hierarchy to modular value chains and beyond

Here is an outline of the theoretical framework used:

- like transaction cost, global commodity chain and organizational theory frameworks, opposite ends of value chain spectrum are capped by markets and vertically integrated firms => middle of spectrum comprised of network relationships which can be broken into 1) modular, 2) relational and 3) captive

- Theory of value chain governance developed by examining conditions for market, modular, relational, captive or vertically integrated global value chains
* 3 key determinants of value chain governance patterns:
1) complexity of inter-firm transactions (transaction costs economics) = knowledge transfer required to sustain a transaction with respect to product and process specifications
2) ability to codify transactions (production networks) = efficient transmission of knowledge (referred to in 1) without transaction-specific investment between parties in transaction
3) capabilities in the supply-base (technological capability and firm-level learning) = of actual and potential suppliers in relation to requirements of transaction
- different ways of handling asset specificity lead to different motivations for constructing complex firm-to-firm relationships that result in 3 types of industrial organization: 1) market, 2) hierarchy and 3) network

- 5 types of global value chain governance (listed highest to lowest regarding explicit coordination and power asymmetry):
1) hierarchy = governance is managerial control, flowing from managers to subordinates or from headquarters to subsidiaries and affiliates
2) captive = small suppliers are transactionally dependent on much larger buyers, suppliers face high switching costs, making them 'captive'; high degree of monitoring and control by lead firms (supplier firms that investment money in transaction-specific capital influenced by lead firm)
3) relational = mutual dependence and high levels of asset specificity managed through reputation, family and ethnic ties (Guanxi or Xinyong according to Menkoff, T., 1992)
4) modular = supplier takes full responsibility for competencies surrounding process technology, use generic machinery that limits transaction-specific investments and make capital outlays for components and materials on behalf of customers
5) market = cost of switching to new partners is low for both parties

Important Results and Conclusions

- information complexity changes as lead firms seek to obtain more complex outputs and services from supply-base (reduce supplier capability or reduced complexity may increase ability to codify transactions)
- new technologies can restart the clock on process codification (on-going tension between codification and innovation) (Storper, 1995 and Davd , 1995)
- supplier competence changes over time (increase as suppliers learn, but fall as buyers demand more or different specifications)
- increasing supplier capability moves GVC away from hierarchy and captive networks toward relational modular and market types
- actors that actively participate in rule-setting process (favors established actors and locations) have a major advantage
- some firms set parameters that value chain actors must adjust to (i.e. Intel or Microsoft), on the other hand, users can subvert original intention of producers (demand-driven innovation, i.e. mountain bike)
Limitations

- cannot oversimplify GVC evolution because:
1) standards that enable codification of product and process are different across industries and constantly evolving
2) standards for codifying product and process specifications become obsolete as technologies change or when there is a drive to bundle value chain activities in new ways
3) knowing standard and adopting protocol may not be straightforward, inexpensive or immediately possible for all actors in an industry, in addition competing standards can make choosing and investing difficult and risky
4) no single best way to organize GVC
- without accounting for rich detail and complexity brought about by historical, geographical and sectoral specificity

Assumptions

This paper assumes it goes beyond traditional transaction cost economics by emphasizing ‘mundane’ transaction costs which according to Baldwin and Clark, 2000 are costs involved in coordinating activities along the chain which arise when: *products are non-standard

*have integral product architectures

*have time sensitive output

It also assumes that network value chains have been brought about by 1) globalization of production and trade into developing countries and 2) vertical disintegration of transnational corporations. I wonder if #2 has arisen in a response to re-strengthen local networks. This may bring about specialization within geographical regions.

Opinion
This paper insinuates that global value chain research will inform policy that will improve possibilities for developing countries to enhance the position in the global market. However, that would not be beneficial if it does not improve their local conditions. I think global value chain research can improve local conditions if the focus were shifted to local conditions and not so much global position. On page 79 it states, "evolution of global-scale industrial organization affects not only the fortunes of firms and the structure of industries, but also how and why countries advance - or fail to advance - in the global economy'” is another example of the position that globalization is the answer to solving local poverty, which is not necessarily the case. Ultimate they state they say,  "the search for paths of sustainable development in global economy is an inherently difficult and elusive objective, ...," so perhaps they are not completely for globalization answering the world’s problems. I have the inkling that sustainable development requires a local focus. My research has yet to prove this.

This paper has been cited 200 times according to Web of Science and 360 times according to Google Scholar since 2005. This paper lends itself to reference since it provides a solid framework from which to build off of. Whether it is entirely useful for crafting policy related to industrial upgrading, economic development, employment creation and poverty alleviation as it set out to do is a different story. At best it is good for predicting or explaining industries, and maybe a better strategizing tool than policy tool.

  Impact on field of food distribution environmental or nutritional impacts
There are two conclusions that can be helpful for advancing local food. The first is that increasing supplier capability moves GVCs away from hierarchy and captive networks toward relational modular and market types. So, essentially empowering local suppliers or developing countries will move to a chain with less power asymmetry. The second conclusion is that actors that actively participate in the rule-setting process (favors established actors and locations) have a major advantage. This idea is very apparent in agriculture given the lobbying power of ADM, Monsanto and other corporate agricultural production firms. Although these firms are not always producing food, they have great influence on the fate of the food industry.
Stated Knowledge Gaps
- How and why do the complexity of information, ability to codify information and supplier competence change?
- development of methods for measuring key variables in the model, effective proxies for transactional complexity, level of codification and supplier
competence must be identified and test in the field
-account for rich detail and complexity brought about by historical, geographical and sectoral specificity

Useful References 
Gereffi, G. and Korzeniewicz, M. (eds) (1994) Commodity Chains and Global Capitalism, Westport: Praeger (esp., Gereffi, G. 'The Organization of Buyer-Driven Global Commodity Chains: How U.S. Retailers Shape Overseas Production Networks')

Gereffi, G. and Kaplinsky, R. (eds) (2001) 'The Value of Value Chains', IDS Bulletin, 32(3), special issue

Reardon, T. Cordon, J-M Busch, L. Lingen, J. and Harris, C. (2001) 'Global Change in Agrifood Grades and Standards: Agribusiness Strategic Responses in Developing Countries',  International Food and Agribusiness Management Review, 2(3): 421-35.

Nadvi, K. and Waltring, F. (2002) 'Making Sense of Global Standards', INEF Report 58, Duisburg: Institut Fur Entwicklung und Frieden, Gerhard-Mercator University.

Dolan, C. and Humphrey, J. (2000) 'Governance and Trade in Fresh Vegetables: The Impact of UK Supermarkets on the African Horticulture Industry',  Journal of Development Studies, 37(2): 147-76

Storper, M. and Scott, A. (1988) 'The Geographical Foundations and Social Regulation of Flexible Production Complexes', in J. Wolch, and M. Dear (eds),  The Power of Geography, Boston: Allen and Unwin, pp. 21-40.

Maskell, P. and Malmberg, A. (1999) 'Localised Learning and Industrial Competitiveness',  Cambridge Journal of Economics, 23(2): 167-85.

Leslie, D. and Reimer, S. (1999) 'Spatializing Commodity Chains', Progress in Human Geography, 23(3): 401-20.

Hughes, A. (2000) 'Retailers, Knowledges and Changing commodity Networks: The Case of the Cut Flower Trade',  Geoforum, 31: 175-90

David, P.A. (1995) 'Standardization Policies for Network Technologies: The Flux between Freedom and Order Revisited', in R. Hawkins, R. Mansell, and J, Skea (eds) , 'Standards, innovation and Competitiveness: The Politics and Economics of Standards in National and Technical Environments, Aldershot, UK: Edward Elgar, pp. 15-35.

Clemons, E. Reddi, S. and Row, M. (1993) 'The Impact of Information Technology on the Organization of Economic Activity: The 'Move to the Middle' Hypothesis',  Journal of Management Information Systems, 10(2): 9-35.

Williamson, O, (1983) 'Credible Commitments: Using Hostages to Support Exchange',  American Economic Review, 73(4): 519-40

Streeck, W. (1992)  Social Institutions and Economic Performance, London: Sage.

Penrose, E. (1959)  The Theory of the Growth of the Firm,  Oxford: Basil Blackwell.

Sturgeon, T. (2003) 'What Really Goes on in Silicon Valley? Spatial Clustering Dispersal in Modular Production Networks',  Journal of Economic Geography 3: 199-225.
Key Concepts
- Value-added chain = 'the process by which technology is combined with material and labor inputs, and then processed inputs are assembled, marketed and distributed. A single firm may consist of only one link in this process, or it may be extensively vertically integrated...' (Kogut, 1985: 15)
- Fragmentation
* physical separation of different parts of production process (Arndt and Kerzkowski, 2001, argue that internationally separating the two is a
contemporary development) perhaps due to cheap labor in developing countries
* 'integration of trade' and 'disintegration of production' (Feenstra, 1998)) => disintegration of multinational firm, more outsourcing => more trade
happening in components and intermediate goods (Yeats, 2001)
- Explicit Coordination = non-market forms of coordination of economic activity (Clemons et al.,1993)
- 3 types of supply relationships (based on degree of standardization of product and process): 1) commodity supplier = standard products through arm's length market relationships
2) captive supplier = makes non-standard products using machinery dedicated to the buyer's needs
3) turn-key supplier = produces customized products for buyers and uses flexible machinery to pool capacity for different customers

Review: (USDA-ERS, 2010) Comparing the Structure, Size and Performance of Local and Mainstream Food Supply Chains

Robert P. King, Michael S. Hand, Gigi DiGiacomo, Kate Clancy, Miguel I. Gómez, Shermain D. Hardesty, Larry Lev, and Edward W. McLaughlin

USDA-ERS Economic Research Report Number 99, June 2010

Objectives

- Improve understanding of how local food products are introduced or reintroduced into the broader food system

- Find potential barriers to expansion of local food markets

- Take first step to gauging how food system may incorporate more local foods to meet growing demand (, improve product quality, support local farmers & economy, agricultural production & dist. practices, environment, food security, nutrition and people's connection to food and farmers)

- provide insight into role of local foods in public policies and programs

- better understand whether local food can:

* reduce food insecurity

* support small farmers and rural economies

* foster closer connections between farmers and consumers

- provide a breadth of understanding differences between types of supply chains

Key Methods/Approach

- 15 case studies in 5 metro areas, 3 supply chain types for each (mainstream, direct market and intermediated)

- Primary data collected through interviews and site visits with principals of farm enterprises, supermarkets, cooperative grocery stores, retail distribution centers and food processors

- Interviews provided: description of supply chain and detailed business information to make comparisons across supply chains (info supplemented by publicly available data from web sites, Census of Agriculture reports, articles and observations of product prices and availability in each location (population, per capita income, national avg comparison))

* Primary sources: news articles; websites; direct observation of product availability and prices in various market settings

* Secondary source: collection of secondary economic and demographic data 

* Direct observation of product availability and prices took place at up to six locations within each MSA: two supermarkets, two natural foods stores, and two farmers markets.

- Each case study describes:

* Sequence of ownership changes

* Production standards

* Traceability

* Information transparency

* Coordination and information sharing

* Food safety practices

* Relevant regulations

* Logistics and transaction costs

* Distribution of revenues among chain participants

* Transportation fuel use

- Case study approach justification: yield multiperspective analysis allowing for in-depth study of all stages in supply chain and interaction among stages (Feagin et al., 1991)

Important Results and Conclusions

- Research Question 1: Local food supply chain structure and size

* Mainstream and local supply chains are used

* Mainstream and local supply chains may use the same retail outlet

*Local supply chains comprise small portion of total product demand or fill a unique market niche

* Higher per unit costs for local products can be offset by unique product characteristics or services, diversity of operations, and access to processing and distribution service

* Local food supply chains, especially direct market, are more likely (than mainstream) to provide detailed information about producers and methods => although, people are not willing to pay premium for information

* Primary influences for paying higher prices are labels such as organic and grass-fed production, not local

* Farms that do participate in local food supply chains:

_have diverse product offerings to defray large fixed costs across multiple sources of revenue

_use multiple types of local market outlets

_diversify by using mainstream outlets as residual market for excess supply

* Local supply chains in study have adequate access to processing and distribution

* Per unit costs for processing, packing and distribution are higher in local supply chains

- Research Question 2: Local food supply chain performance

* Producers receive greater share of retail price in local chain (per unit ranges between = and 7x vs. mainstream)

* For cases in the study, producers assume responsibility for additional supply chain functions such as processing, distribution and marketing to avoid losing revenue to outside source (costs to bring product to market range between 13 and 62 percent)

*Mainstream:

_Seasonality plays role in share of revenue retained locally (some use non-local sources to fill off-season windows)

_ Also benefit local areas as a whole through retail distribution services

* Transportation fuel use more closely related to supply chain structure and size rather than distance traveled (fuel per unit in local chain can be greater despite less mileage, mainstream offsets with larger loads and logistical efficiencies that outweigh longer distances)

Experimental design, statistical analyses or analytical approach flaws and strengths

- Pre-tested during pilot case study

- Triangulation protocols to invite multiperspective analysis and ensure data accuracy (Stake, 1995)

- A “recorders’ guide” was developed to outline data collection techniques and to help facilitate consistency across direct observation of product availability and price (http://foodindustrycenter.umn.edu/Local_Food_Case_Studies.html)

Assumptions made with the data, calculations, models? Reasonable?

- Definition of "local" according to this study: "one that is raised, produced, and processed in the locality or region where the final product is marketed. This definition relies on the specification of a relevant “locality or region” that may vary from place to place."

* either state boundary or Metropolitan Statistical Crea (MSAs; U.S. Census Bureau, OMB, 2008)

- Local food supply chain (vs. local food product)

*set of trading partner relationships and transactions that delivers a local food product from producers to consumers

* conveys information about product enabling consumers to recognize it as local food product

* strive to create bond between producer and consumer regardless of intermediary segments

- in contrast to mainstream supply chains, local food supply chains convey detailed information about where, how, and by whom products were produced

- Local food supply chains are further assumed to operate with relatively few segments, linked by trading partner relationships characterized by high degrees of trust and information sharing

- social capital formation

Opinion

According to Google scholar this report has not yet been cited. This is most probably due to the recent publishing of this report in January 2010 (6 months earlier than this post). The report did do a good job of addressing the issue of food in a thought and organized manner, but more object focused than the average news article. However, the conclusions and results can be presented in a more apparent/graphic manner.

One projection made by the authors was that this is an "initial step toward gauging how the food system might incorporate local foods in the future. (p. iv)” I question this perspective, in that: wasn’t local food our past? Another statement put forward by the authors was that local foods chains strive to create bond between producer and consumer regardless of intermediary segments, which might be true however the chef, Dan Barber, promotes the idea of building a relationship with nature instead to measure success and increase returns. The perspective confined in this report narrows possibilities. One conclusion about local supply chain structure and size (p. iv) was that local supply chains do not rely on national infrastructure or other local supply chains to product volume to reduce per unit costs. While this may be true, limiting the concept of what the profit is from the venture to a monetary value constricts how this problem is approached. My last specific criticism of this report is that it claims, as recommended by Stake (2006, p. 23- see ‘Useful References’ below), the product-place combinations were selected to provide rich comparative analysis across products, geographic locations, and chain types. However it qualified this by saying, resources limited study in Southeast or Southwest. My criticism is that it neglected to consider Hawaii and Alaska, two regions/states that are vastly different from the rest of the country.

Below are the specific research questions posed by this report. These questions were addressed differently for each product and sometimes comparatively across products when possible. The authors stayed within their framework of examining supply chain structure, size and performance for each product and across each product. I have merely outlined them here as reference for a more specific study about Hawaii:

Meet stated objectives?

- 6 supply chain structure research questions:

• Do direct and intermediated food supply chains provide the consumer with detailed information about where, by whom, and how the product was produced?

• Are durable relationships between supply chain partners—characterized by a high degree of trust, information sharing, and decision sharing over time—important in food supply chains where trading partners exhibit strong mutual interdependence or one partner depends on another in a unique way?

• Are prices in direct and intermediated food supply chains decoupled from prices determined in commodity markets?

• What is the role of collective organizations (such as producer and consumer cooperatives and farmers markets) in direct and intermediated food supply chains?

• Does the presence of a strong industry that distributes nationally or internationally help create an infrastructure of knowledge and services that facilitates the development of direct and intermediated food supply chains?

• Does the presence of local food supply chains for other products and broader local food initiatives help create an infrastructure of knowledge and services that facilitates the development of successful direct and/or intermediated food supply chains?

- 5 supply chain size research questions:

• What is the portion of total demand in a general product category represented by products sold in direct and intermediated food supply chains?

• Do problems with access to and costs associated with processing and distribution services limit the size of direct and intermediated food supply chains and raise product costs to the point where it is difficult to compete with products in mainstream food supply chains?

• Do fixed costs for compliance with regulatory and operating standards (public or private) limit the ability of low-volume local food products to enter mainstream supply chains?

• Does lack of year-round availability limit market opportunities for local food products?

• Do direct and intermediated food supply chains respond to growth opportunities through replication of firms or through internal expansion?

- 5 supply chain performance research questions:

• After subtracting marketing costs, do producers receive higher per unit revenue and retain a greater share of the price paid by the final consumer in direct and intermediated food supply chains?
• Is differentiation by quality attributes other than “local” that require extra effort or unique capabilities necessary to receive and sustain price premiums for local food products?
• Does concentration of costs for employee and proprietor labor inputs in farm and processor segments of direct and intermediated food supply chains result in a larger contribution of wage and business proprietor income to local economies?
• Does a typical unit of product in direct and intermediated food supply chains travel fewer miles and use less fuel for transportation per unit of product sold?
• Do direct and intermediated food supply chains foster the creation of social capital and civic engagement in the consumption area?

Impact on field of food distribution environmental or nutritional impacts?

- How to do similar analysis for Hawaii? Tuna or Tilapia? Potatoes or Tomatoes or Onions? Bananas? Milk or Beef?

- Can also be done US Mainland, Foreign, or Local versus Mainstream, Direct or Intermediary?

Opportunities for expansion of local food supply chain additional research:

- product attributes

- sales volumes

- prices

- sustainability of price premiums for products sold locally

Knowledge Gaps:

- variety of supply chains for local food

- economic performance of local food supply chain

- human health performance of local food supply chain

- environmental performance of local food supply chain

- social performance of local food supply chain

- this study does not examine consumer perceptions and behavior

Useful References

“Research Design for Case Studies on Local Food Systems,” http://foodindustrycenter.umn.edu/Local_Food_Case_Studies.html.

Yin, Robert K. (1989). Case Study Research: Design and Methods, Revised Edition. Beverly Hills, CA: Sage Publishing.

Yin, Robert K. (1994). Case Study Research: Design and Methods, Second Edition. Applied Social Science Research Methods Series, Vol. 5, Thousand Oaks, CA: Sage Publications.

Feagin, J., A. Orum, and G. Sjoberg (eds.) (1991). A Case for Case Study. Chapel Hill, NC: University of North Carolina Press.

Ostrom, Marcia (2007). “Everyday Meanings of “Local Food”: Views from Home and Field.” Community Development 37 (Spring):65-78.

Case Study Synopses
• Apples: Syracuse, NY (nationally distributed)
* Mainstream: supermarket chain
 Direct Market: producer at farmers market
  Intermediated: school district that purchases apples for inclusion in school lunches 
* Local Geography by Place: New York State

• Blueberries: Portland-Vancouver-Beaverton, OR-WA (nationally distributed with international competition)

* Mainstream: major super-market chain supplied in part by local packer

   Direct Market: producer who sells through farmers markets and farm stands

   Intermediated: regional natural foods chain that features locally produced berries

* Local Geography by Place: Oregon and Washington State

• Spring mix: Sacramento, CA (value-added & branded)

* Mainstream: upscale supermarket chain

   Direct Market: local producer celling at a farmers market

   Intermediated: natural foods grocery cooperative selling locally grown spring mix

* Local Geography by Place: Sacramento, CA MSA (El Dorado County, Placer County, Sacramento County and Yolo County)

• Beef: Minneapolis-St. Paul-Bloomington, MN-WI (value-added and branded)

* Mainstream: upscale supermarket's store-brand beef

   Direct Market: local grass-fed beef sold direct to consumers

   Intermediated: local grass-fed beef sold in supermarkets, restaurants and food service outlets

* Local Geography by Place: Minnesota and Wisconsin

• Fluid milk: Washington, DC (value-added & branded)

* Mainstream: private-label milk from commercial dairy cooperative

   Direct Market: local brand sold through a home deliver service

   Intermediated: local organic private-label brand sold in a small chain of grocery stores

* Local Geography by Place: Washington-Baltimore-Northern Virginia Combined Statistical Area, composed of the Baltimore-Towson, MD, MSA; Culpeper, VA, and Lexington Park micropolitan statistical  areas; Washington-Arlington-Alexandria, DC-VA-MD-WV MSA;  and Winchester, VA-WV, MSA; plus the counties immediately adjacent  (i.e., share a border) to the combined statistical area.

Opportunities for expansion of local food supply chain additional research:

- product attributes

- sales volumes

- prices

- sustainability of price premiums for products sold locally

Knowledge Gaps:

- variety of supply chains for local food

- economic performance of local food supply chain

- human health performance of local food supply chain

- environmental performance of local food supply chain 

- social performance of local food supply chain

- this study does not examine consumer perceptions and behavior

Public Policy Interactions:

- compliance with voluntary food safety programs & third-party certification

- product traceability (record keeping)

- public programs to assist new and expanding enterprises

- expanded focus on differences in fuel and energy use in all supply chain segments

- comparison of relative environmental impacts across supply chains

- differences in supply chain linkages, retail prices and input costs between supply chain types => relative impacts of consumer spending in local economy

- supply chain structure determination in number and types of jobs that local supply chains create relative to mainstream chains

Local food perceptions:

- fresher

- freer of chemicals

- direct interaction with producer

- greater sense of community

- belief that helping the environment, small farmers or local economy

- idealized type of farmer or relationship, associating them with small, independent or trustworthy (Ostrom, 2007, pg. 74)

Supply chain = "set of processes, trading partner relationships, and transactions that delivers a product from the producer to the consumer"

Legally recognized definition of a “locally produced agricultural food product” for certain Federal rural development loan programs: "Any agricultural food product that is raised, produced, and distributed in – (1) the locality or region in which the final product is marketed, so that the total distance the product is transported is less than 400 miles from the origin of the product or (2) the State in which the product is produced." (Adopted in the Food, Conservation, and Energy Act of 2008, Public Law 110-246, June 18, 2008. The definition applies to Business and Industry loan and loan guarantees administered by USDA’s Rural Development Agency. See 7 USC 1932(g).)